The STB released July headcount data for the rails (U.S. operations only) today (8/16/19). Total headcount declined 5% y/y in July vs. -4% and -3% the prior 2 months, and this was the largest y/y decline since January 2017. Total headcount fell 0.5% m/m, the 8th straight sequential monthly reduction.
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Trucking (Market Weight): We spoke with an industrial products shipper about recent truck capacity and pricing trends. The shipper continues to experience elevated TL tender acceptance rates in the high-90s, and his routing guide rarely goes past his primary carrier on any lane. Our contact completed a TL bid in the Spring and reduced his rates by 7%-10%. But given continued weakness in the spot market, spot rates are now already back below his contract rates. This shipper is preparing another TL bid for 4Q, and he expects to realize 5% savings on lanes that were not included in his Spring ’19 TL bid. Our contact added that TL capacity is so loose that he’s shifting some long-haul intermodal traffic to TL brokers since they’re offering cheaper pricing and faster transit times. Our contact is also a big user of LTL capacity, but pricing has remained disciplined despite TL looseness with pricing increases of 2%-4% from his core LTL carriers this year.
Today (08/14/19), the FMCSA issued proposed changes to Hours of Service (HOS) rules for commercial truck and bus drivers. These changes would increase flexibility for TL drivers and thus add to overall TL capacity. While these proposed changes would be positive for utilization for our TL companies under coverage, we view increases in TL capacity as negative for TL pricing and the stocks in such a fragmented industry.
Excluding several non-recurring items, YRCW reported 2Q EBITDA on Friday of $59M, down 35% y/y and 14% below our expectation. Consolidated tonnage and yields were in line with our model, but Freight and Regional both missed our margin expectations. YRC Freight reported a 97.4% OR (90bp worse y/y), and Regional reported a 99.1% OR (510bp worse y/y and its worst 2Q in 10 years). The stock fell 25%.
We spoke with an industrial products shipper about recent truck and intermodal pricing and capacity trends. This shipper isn’t seeing any signs of the market tightening yet as his TL tender acceptance rates continue to hover near 100%. From a pricing standpoint, our contact’s TL rates are down 12% y/y. Meanwhile, our contact shifted a long-haul intermodal lane to truck last fall due to significant service variability with intermodal delivery times ranging from 5-20 days. This shipper has no plans to move the volume back to intermodal until TL capacity tightens as he’s now only paying a slight premium on his trucking rates. And this premium is more than offset with the operating and inventory savings associated with the TL move. In addition, the weakness in one-way TL pricing right now also makes it tough to justify adding more Dedicated lanes right now.
This morning (8/7/19), Bloomberg reported that FedEx Ground will not renew its contract with AMZN when the current contract expires at the end of August. This follows the loss of FDX’s U.S. Express contract with AMZN in June. We estimate that Ground handled around 20% of the AMZN business, implying around $200M of annual revenue. Assuming 15% decremental margins, we estimate a $0.09 (0.6%) annualized EPS drag for FDX. While this headwind wasn’t contemplated in FDX’s guidance, it’s not really material. See Exhibit 1 in the full note.
Nearly 50% of shippers we surveyed this quarter cited higher inventory levels compared with a year ago, above the 23% seeing lower inventories. Also, 48% of shippers noted that their inventories are currently above targeted levels. In addition, shipper budget expectations slowed to their lowest level in over three years. So, shippers expect the muted freight environment to continue for now.
Our WR Transport index rose 4.7% in July and outperformed the S&P 500 (+1.3%) for the second month in a row. Transports also outperformed all S&P sectors last month. With the nice bounce in the group the past 2 months, our Transport index is now up 17.3% YTD and is slightly outperforming the S&P 500.
Our WR Transport index fell 2.3% last week but still outperformed the S&P 500 which fell 3.1%. The LTLs (+4%) outperformed materially following SAIA’s strong report, while the Integrators (-5%) with more international exposure underperformed the most following the latest tariff news. Notably, the LTLs (+27% YTD) have now overtaken the Rails (+24% YTD) as the top performing transport sub-sector this year. So we’ll focus today on what’s going right for the LTLs and why momentum has faded a bit for the Rails. Open the full report for more details…
Pasted below, please find our Friday Freight note. We distribute this product via email each Friday mid-day, so clients have some freight reading material to make their weekends truly worthwhile! Your feedback is always appreciated if you have any suggestions.
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